Question 1

Although the U.S.Federal Reserve had traditionally made discount loans only to commercial banks, in response to the financial crisis in 2008 the Fed made ________ eligible for discount loans as well.

Accepted Answer

The Fed made primary dealers eligible for discount loans in response to the financial crisis in 2008. Primary dealers are financial firms that have a special relationship with the Fed and are authorized to transact in government securities.

Question 2

In 2008, the U.S.Treasury and the U.S.Federal Reserve took action to save large financial firms such as Bear Stearns and AIG from failing.Which of the following is one reason why these measures were taken?

Accepted Answer

The bankruptcy of a large financial firm would have caused it to sell off its securities holdings, which could trigger a widespread panic and cause other financial firms that hold these securities to also fail. This could lead to a systemic financial crisis and severe economic downturn. The actions taken by the Fed and Treasury were to prevent such a scenario. The other options presented are either inaccurate or not directly relevant to the situation.

Question 3

The larger the fraction of an investment financed by borrowing

Accepted Answer

Financing a larger portion of an investment with borrowing (leverage) amplifies both potential returns and potential losses because any return on the investment is magnified by the borrowed amount, but so is any loss, relative to the equity initially invested.

Question 4

Beginning in 2008, the U.S.Federal Reserve and the U.S.Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways.Briefly summarize the actions of the U.S.Fed and the U.S.Treasury.

Accepted Answer

The answer of Beginning in 2008, the U.S.Federal Reserve and...

Question 5

The U.S.Federal Reserve and the US Treasury responded to the 2008 financial crisis in several ways.Which of the following is not one of the ways the Fed and the Treasury responded?

Accepted Answer

The Fed did not lower the required reserve ratio on demand deposit accounts. In fact, during the crisis, the Fed actually raised the reserve requirements for banks in order to ensure stability in the financial system.

Question 6

With the Troubled Asset Relief Program (TARP), the U.S.Treasury provided funds to banks in exchange for stock.

Accepted Answer

This is correct. TARP, also known as the Emergency Economic Stabilization Act of 2008, allowed the U.S. Treasury to purchase troubled assets, such as mortgage-backed securities, from banks and other financial institutions in order to stabilize the financial system. However, in many cases, the funds provided to banks were in the form of equity or preferred stock, rather than direct loans.

Question 7

Firms that participate in regular open market transactions with the US Federal Reserve are called

Accepted Answer

Firms that participate in regular open market transactions with the US Federal Reserve are called primary dealers. These firms are authorized to trade US government securities with the Federal Reserve in order to implement monetary policy. They are typically large commercial or investment banks.

Question 8

By the height of the U.S.housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to ________ borrowers with flawed credit histories and ________ borrowers who did not document their incomes.

Accepted Answer

The given passage talks about the loosening of standards for obtaining a mortgage loan, which led to granting mortgages to sub-prime borrowers with flawed credit histories and "Alt-A" borrowers who did not document their incomes. Therefore, option A is the correct answer. Options B, C, D, and E do not accurately reflect the situation described in the passage.

Question 9

In the following table, fill in the columns for your return on investment if the price of your house increased or decreased by 20 percent, based on the down payments specified in the first column.
Return on Your Investment From

Accepted Answer

The answer of In the following table, fill in the...

Question 10

Which of the following is a reason that Canada did not see a housing bubble and banking crisis in 2008?

Accepted Answer

The Office of the Superintendent of Financial Institutions (OSFI) in Canada was more conservative than banking regulators in other countries, implementing stricter regulation and oversight of financial institutions. This helped to prevent risky lending practices and the formation of a housing bubble in the Canadian market.

Question 11

In October 2008, the U.S.Congress passed the ________, under which the U.S.Treasury provided funds to banks in exchange for stock.

Accepted Answer

The Troubled Asset Relief Program (TARP) was passed in October 2008 and allowed the U.S. Treasury to provide funds to banks in exchange for stock. The other options listed do not accurately describe this program.

Question 12

Low interest rates that resulted from the Bank of Canada's response to the global financial crisis have caused Canadian household debt to disposable income ratio to ________, causing the likelihood of a housing bubble to ________.

Accepted Answer

The low interest rates led to increased borrowing and spending by Canadian households, which caused the household debt to disposable income ratio to increase. This increased borrowing also led to a rise in the demand for housing, which has increased the likelihood of a housing bubble forming.

Question 13

Canadian banks are regulated by the Bank of Canada.

Accepted Answer

Canadian banks are actually regulated by the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation. The Bank of Canada plays a broader role in overseeing Canada's financial system but does not directly regulate the banks.

Question 14

The United States saw a housing bubble and banking crisis emerge between 2007-2009.When did Canada see its housing bubble and banking crisis emerge?

Accepted Answer

Canada did not experience a housing bubble and banking crisis during the period when the United States did. Canadian banking systems and regulations were more conservative, which helped the country avoid the severe impacts seen in the U.S.

Question 15

While many analysts defended the actions taken by the U.S.Federal Reserve and the U.S.Treasury to respond to the financial crisis in 2008, others were critical of these actions.The critics were concerned that by not allowing large firms to fail

Accepted Answer

Critics argued that rescuing large firms sets a precedent, encouraging other firms to take on excessive risks under the assumption that they too would be bailed out, a concept known as "moral hazard."

Question 16

A borrower defaults on a loan when he stops making payments on the loan.

Accepted Answer

This statement is true. A borrower defaults on a loan when he fails to make payments as agreed upon in the loan agreement.

Question 17

If the amount you owe on your house is greater than the price of the house, you have

Accepted Answer

Negative equity in your house means that the value of your house is less than the amount you owe on your mortgage. This can happen if the value of your house decreases or if you took out a mortgage for more than the value of your house. It can be a risky situation because if you have to sell your house, you'll still owe money on the mortgage after the sale.

Question 18

To reassure investors who were unwilling to buy mortgages in the secondary market, the U.S.Congress used two government sponsored enterprises, Fannie Mae and Freddie Mac, to stand between investors and banks that grant mortgages.Fannie Mae and Freddie Mac

Accepted Answer

Fannie Mae and Freddie Mac sell bonds to investors and use the funds to purchase mortgages from banks. This allows investors to indirectly invest in mortgages, while still having the guarantee of repayment through the government-sponsored enterprises. It also provides liquidity for banks to continue granting mortgages, as they can sell them to Fannie Mae and Freddie Mac who then package them into bonds for investors.

Question 19

Mortgage lenders often resell mortgages in secondary markets.How might this make lenders act differently than if they intended to hold the mortgages themselves?

Accepted Answer

The answer of Mortgage lenders often resell mortgages in secondary...

Question 20

By the 2000s, an important change in the U.S.mortgage market had occurred when ________ became significant participants in the secondary market for mortgages.

Accepted Answer

The answer of By the 2000s, an important change in...

Quiz 11: Monetary Policy